Myworld inc is an all-equity firm whose current business

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MyWorld, Inc. is an all-equity firm whose current business involves manufacturing and selling software. The company is blessed in that it operates in capital markets that are perfect, that is, there are no taxes or bankruptcy costs. The current weighted average cost of capital (WACC) of MyWorld, Inc. is 8.50%, and its equity beta is 0.90. MyWorld, Inc. is considering penetrating the wine industry, and would like its total value to consist of 70% software and 30% wine. The wine project requires a $800,000 investment at t = 0 and will yield $150,000 a year for the following 40 years, starting a year from today (at t = 1). The manager of the new project has found that the average return on equity is 20%, and the average debt-to-equity ratio is 1.00, in the wine industry. All the debt in this industry is viewed as default free by the market. The risk free rate is 4%, the market risk premium (the average difference between the return on the market and the risk-free rate) is 5%, and the wine project will be financed with $600,000 of debt. What is the NPV of this project?

Reference no: EM13482970

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